UK Government looks to ensure 2020 compliance with EU ETS in the Brexit deal

On 21 March 2018, during a parliament committee hearing on the Impact of Brexit on the European Union Emissions Trading System (EU ETS), the United Kingdom (UK) Government expressed its aim to ensure UK participation to the EU ETS until the end of phase three, including 2020. If the UK were to remain compliant with the EU ETS to the end of Phase three, there would be no need for the Brexit Safeguard mechanism that would disallow covered entities from surrendering allowances issued by a Member state after January 2018 that no longer had compliance obligations under the EU ETS. In the case of a hard Brexit, the amendment would have made void any allowances auctioned by the UK government from 2018 if it were not to remain a part of the EU ETS.

Three days prior to the event, on 19 March, Brexit negotiators had reached agreement on a transition period until December 2020, in which the UK would no longer participate in EU decision-making but continue to remain part of the single market. Without any additional regulation, this deal would warrant UK compliance with the EU ETS for 2018 and 2019 but not 2020. Article 92 of the agreement, which has been proposed by the European Commission but on which negotiations are still ongoing, would ensure UK compliance for 2020 as well.

Whether the UK will continue to participate in the EU ETS in the post-2020 period is also still under consideration. The feasibility of staying in the EU ETS would depend on whether or not the UK was part of the single market. Otherwise, a Swiss-style linking between the EU and UK could be an option, yet establishing such a link would likely take some time. Participation of the UK in other cap and trade programs could be a possible alternative. During the parliamentary hearing, UK Minister of State at the Department for Business, Energy and Industrial Strategy Claire Perry expressed her preference of a cap-and-trade system over a carbon tax, but stated that it would be a duty for the UK to also look at other opportunities outside the EU ETS.

The European allowance price responded to the increased clarity surrounding UK participation in phase three of the EU ETS rising by more than 10% to a new 6.5-year high.